Standing Committee D

[John Bercow in the Chair]

[Continuation from column 604]

Clause 161

Duty to avoid conflicts of interest

Jonathan Djanogly: I beg to move amendment No. 256, in clause 161, page 71, line 2, after ‘must’, insert ‘take all reasonable steps to’.

John Bercow: With this it will be convenient to discuss the following amendments:
No. 323, in clause 161, page 71, line 3, leave out ‘, or possibly may conflict,’.
No. 322, in clause 161, page 71, line 4, at end insert
‘at the time when he seeks authorisation pursuant to subsection (5) below.’.
No. 257, in clause 161, page 71, line 11, leave out paragraph (a) and insert—
‘(a) if the director reasonably and in good faith believes the situation is not likely to give rise to a conflict of interest; or’.
No. 255, in clause 161, page 71, line 21, at end insert—
‘( ) The authorisation may, in either case, be given by them (unconditionally, or subject to such conditions or limitations as they may specify), either in relation to a particular matter or generally, following receipt by them of a general notice in accordance with section 168.’.
No. 167, in clause 161, page 71, line 29, at end add—
‘(8) Where a conflict or potential conflict arises because of multiple directorships, the duty is not infringed if the director ensures there is no disadvantage to the interests of the company.’.

Jonathan Djanogly: This is a complicated clause, in what is clearly the controversial part of the Bill. It replaces the existing no conflict common law rule and covers all conflicts between the interests of the director and the company. A significant change in subsection (4) is that independent directors can authorise another director’s conflict. In the case of a public company, such authorisation must be allowed by the company’s constitution. In the case of a private company, authorisation can be given by the directors so long as nothing in the company’s articles invalidates such authorisation. By virtue of clause 156(2)(a), this duty is extended to former directors in relation to
“the exploitation of...property, information or opportunity of which he became aware at a time when he was a director”.
The Law Society, among others, has pointed out that there is a significant difference between the common law rule on conflicts of interest and the wording of clause 161. Notably, the common law rule maintains a negative position, whereas the clause imposes a positive duty. That is a key concern that has been raised by many stakeholders. There is a fear that this positive duty might impact on the ability of a director to assume multiple directorships, which is a feature of the UK company system and provides a number of benefits to companies of all sizes. I should like to quote from a briefing that we have received from the City law firm, Allen and Overy. It states:
“At present, a director may comply with the duty to avoid conflicts of interest by taking appropriate action to ensure that a company is not disadvantaged by any conflict of interest the director may have i.e. by not taking part in a particular matter. Based on the current formulation, which is widely expressed to avoid a situation where there is, or may be, a potential conflict, there is arguably no place for multiple directorships.”
We believe that it will be more difficult for directors to hold multiple directorships, and that could affect the pool of non-executive directors, which is itself a current problem. This is of particular concern to the private equity and venture capital industries, where executives of private equity firms routinely hold multiple non-executive directorships. The British Venture Capital Association made the point clear in a letter of 12 January to Lord Sainsbury of Turville. It stated that the clause
“may result in individuals refusing to hold multiple directorships. If this happens, it will affect the private equity industry’s ability to attract non-executive directors who can sit, or may want to sit, on multiple boards.”
It continues by saying that is it important that the clause
“is amended to avoid any uncertainty in relation to this issue.
It is standard practice within the UK private equity industry for a private equity fund to have the right to appoint one or more non-executive directors (‘NEDs’) to each company that the fund is providing investment to. Invariably, the private equity firm that has organised the company’s investment by the private equity fund will select the NEDs and these will either be executives of the private equity house or independent experts who may have industry-specific knowledge. The effect of this kind of industry arrangement is that often these executives or independent experts will hold non-executive directorships in a number of companies associated with the private equity firm and the funds of which the private equity firm manages.”
The letter then says that the clause
“places an absolute obligation on a director of a company to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In practice, taking on any additional directorship is likely to give rise to difficulty under this provision as almost any additional directorship ‘possibly may’ conflict. Although this duty will not be infringed if the situation cannot ‘reasonably be regarded as likely’ to give rise to a conflict of interest...it will not always be easy for a director to be able to rely confidently on this safe harbour when accepting an additional directorship.”
The letter goes on to state that the other safe harbour provided in subsection (4)(b)
“which allows the other directors to authorise the ‘matter’, would appear to require specific permission to be given to each additional directorship at the time it is taken on. This would, in effect, amount to a need for an NED to seek permission each and every time he wants to accept an additional NED post, which is not practicable. It needs to be clear at the outset that the NED can take on other directorships, subject only to having to disclose them.”
The letter continues:
“If a person holds more than one non-executive directorship and a conflict arises but the person cannot explain the reason for the conflict (e.g. because the information giving rise to is confidential or price sensitive), it seems that the director’s only option will be to resign rather than to absent himself of herself from decision making as would be the case at present.”
The letter urges that the clause should be amended
“to provide a mechanism for a person to be able to take on multiple directorships and for a person who holds multiple directorships to be able to deal with conflicts in the same way as they can now.”
It goes on to say that it
“should state that a director of a company (the ‘first’ company) should be able to accept an additional directorship with another company (the ‘second’ company) if at that time of his or her appointment as a director of the second company, there is no actual conflict with the interests of the first company. If a conflict arises after the director has been appointed as a director of the second company, the director should be able to absent himself or herself from decision making or obtain authorisation from the directors of the relevant companies as envisaged by”
subsection (4)(b).
Those concerns should not be taken lightly. Private equity and venture capital are growing industries in the UK, and more and more of our successful companies are being financed by private equity. The industry has been a valuable driver of business growth. We should not put barriers in the way of those who want to invest in UK companies, particularly the small start-ups that are often the target of venture capital investment.
Those who practise law in this area have also raised concerns with us. As a City lawyer said to me, the key issue is that, currently, a director in the conflict position can manage the problem by removing himself from the company’s decision-making process when a conflict arises. The draft new law seems to go much further, imposing a duty to avoid the possibility ofa conflict in the first place. If that is not the Government’s intention, an explanation should be provided as to how directors of more than one company can manage a situation in which duties to those companies will conflict. As the Government have not been forthcoming with an explanation, we tabled the amendments to rectify the problem. Amendment No. 167 would meet the concerns by stating that if there is no disadvantage to the interests of the company, a director may hold multiple directorships.
Amendment No. 257 would allow directors to exercise their subjective judgment as to whether a situation is likely to give rise to a conflict. We should show UK company directors that we have faith in their judgment, but the Government seem not to be doing that with this clause.
Amendment No. 255 was drafted for us by the Law Society. A similar amendment was rejected by Lord Goldsmith in the other place, and both the Conservative party and the Law Society sincerely hope that the Government will reconsider their position. The Law Society is clear on this point. In its June 2006 Commons briefing, it states:
“As a matter of principle, we do not think that a director should be at risk of being in breach of duty in a case where he may be unable to prevent the breach arising, because the breach arises as a result of an action by a company of which he is a director, rather than because of an action that he has taken himself...We are very concerned that the effect of Clause 161 will be to make it almost impossible for a director of more than one company to manage conflicts which may arise between the interests of the companies of which he is a director. At present, it is normal for a director who finds himself in such a position to manage the conflict by absenting himself from meetings at which the matter giving rise to the conflict is discussed. Only in the most extreme cases would a director be expected to resign. It is by no means clear that such an approach will be possible in future. As a result, it is likely not only that directors will be required to resign from multiple boards more frequently, but also that individuals will be very reluctant to put themselves forward to take up non-executive posts.”
We tabled amendment No. 322 to make the clause slightly less onerous. The clause could be used against directors’ future conflicts of interests, or in relation to conflicts of which they were not aware. The amendment would limit the scope of the clause to the period when the director seeks authorisation. Similarly, we have tabled amendment No. 323 to remove wording that could be used to threaten directors with possible future conflicts of interest. That would be an onerous requirement for a director to take account of and is not commercially realistic.
Amendment No. 256 has been tabled to allow directors to take all reasonable steps to avoid a conflict of interest. That is a fair allowance for directors who will be running a day-to-day business and should not be unfairly pressured to research every possible conflict of interest that might arise. In his response to amendments to clause 161 in the Lords Grand Committee, Lord Goldsmith said that a director who obtains his board’s consent to another appointment will be entitled to assume that that consent “franks” any subsequent conflict that arises in practice. In our view, and that of most experts, it is far from clear that that will be the case. If that is what the Government believe, however, we would like them to clarify it inthe Bill.
The clause refers throughout to authorisation of “the matter” by the board. It is hard to imagine that, when a specific conflict has arisen between two directorships, a court will take “the matter” to mean the director’s original appointment to the directorship giving rise to the conflict, rather than the circumstances of the conflict. If our concerns are correct, it is unlikely that board approval would be a realistic option in many cases, given the confidentiality obligations to which the director is likely to be subject. In real life, the director will owe duties of confidentiality to each company of which he is a director. In such a case, we fear that the only course open to him in practice will be to resign.
The change may have a significant effect on the availability of suitable non-executive directors for company boards. The introduction of words that specifically provide for general consent will go some way towards alleviating that difficulty. The Minister has heard arguments from legal practitioners with many years’ experience, the Law Society and the venture capital industry. Lord Goldsmith said that he thought he was steering the right course between placing burdens and restrictions on enterprise and looking after the interests of shareholders, but we suggest that he has veered too far in the direction of restrictions. A great number of highly successful businesses will be affected by the provision, and because of it, many smaller businesses may not receive the funding and expertise that they so greatly need.
The Government fail to appreciate, first, that companies often want non-executive directors who are successful in another company in the same sector to enjoy the benefit of their experience, and secondly that such directors will have much to learn and benefit from by seeing other companies in action. The clause could threaten that.
The United Kingdom Shareholders Association and others have objected to subsection (4)(b), which allows directors to authorise the conflict of interest situation without even informing shareholders. The UKSA recommends that such authorisation should at least appear in the company’s next annual report. Under the provision, directors can still authorise the conflict of interest situation without informing shareholders, if the company constitution allows. Any conflict should be reported in the company’s annual report in the case of public companies, but the requirement might be a burden for smaller private companies.
Norton Rose in its report also had something to say on the matter:
“The new clause permits a company’s rights to be waived by the prior consent of the board, provided in the case of a public company, that such board approval is permitted by its constitution. The company can nevertheless provide in its articles of association that shareholder approval is required. In practice, smaller private companies are likely to welcome the ability to sanction a transaction involving a possible conflict by board resolution.”
Will the Government please explain why, if they are committed to encouraging people to become non-executive directors, they do not support our position on that issue?

Quentin Davies: My hon. Friend has raised an important point, and I hope that the Government will satisfy him that the clause will not prevent people from holding multiple directorships. It would deal the most devastating blow to the way in which business is run, make an exception of this country in the western world, and be a great handicap to business. It would make matters impossible if the results that my hon. Friend foresees were ever to come about. I am sure that the Government recognise that.
It is a benefit if one sits on more than one board, because one takes different perspectives. One sees different sectors of activity and has many of the same classic business problems in different circumstances. One can be much more useful as a director if one has those different perspectives, rather than the limited experience and vision from one company in one sector. It is none the less important to avoid conflicts of interest in life in any role in which one has a fiduciary responsibility, and the role under discussion has an important fiduciary responsibility.
When I read the clause, I thought that it was severely drafted. Amendment No. 257 would go quite a way to making it look more reasonable. I took some comfort when I first read the draft that subsection (4)(b), taken with subsection (5), would provide the obvious solution: if a member of a board wants to join another board, he must not only declare the interest but clear that new membership with both boards. That is a practice that all of us who have been in business have automatically adopted in such circumstances for years. I cannot imagine anyone wanting to do anything else.
I cannot quite remember—the hon. Member for Cambridge may remind me—whether the situation is the same in this country as it is in France, where I also sit on a board. In France it is an absolute requirement that any other directorships held by a director must be declared in the annual report and accounts. That seems a very sensible provision, which we should adopt if we do not already have it here formally as part of law. It is certainly good practice. There should be a declaration of interests. There may be circumstances in which, having declared an interest that may be in conflict, one wants to remind one’s board colleagues about it. Even if the interest has been declared at the outset and one has their consent to hold both directorships, there may be circumstances in which people might feel that they do not want to take part in a discussion on a particular matter because there could be a conflict. That arises in many other fields than just business. It could arise in many contexts in politics, in government, in managing a charity and any other field where one has fiduciary responsibilities.
My hon. Friend has raised an important issue. It would be extraordinarily perverse and I simply cannot believe that the Government would allow a situation to arise in which it was not possible to be a director of different companies at the same time. I do not think that one should be a director of 55 different companies, and I cannot conceive of a scenario in which one can do a proper job on behalf of shareholders of so many companies, even if there is a very small number of shareholders or they are wholly owned subsidiaries.
I do not see the need to provide for blanket authorisations for people to be members of any number of boards without getting consent in each case. It is absolutely elementary that if someone is going to have two different fiduciary responsibilities, they should declare to both groups of people on behalf of whom they exercise those responsibilities that they have the other responsibility too, and to seek authorisation on every occasion. I do not think that that will be very onerous. I do not think that anyone can do a serious job in business if they have such a large number of directorships that it becomes a real problem to seek authorisation each time they take up a new one. I am not entirely persuaded by my hon. Friend on that point, but the main thrust of what he said is extremely important, and I hope that the Government will be able to come up with some satisfying and convincing answers to it.

Mike O'Brien: There is no problem with people holding multiple directorships. I can see that there may be quite substantial benefits in that from time to time, depending on the circumstances. It certainly is the case in venture capitalism and the way in which private equitable capital is developing that a number of people hold quite a few multiple directorships. All that is required is the exercise of a reasonable amount of diligence and care, getting the proper authorisation and letting people know what is going on. There are clear duties here. I do not think that anyone disagrees with those duties. It is necessary, however, for people to be properly informed about what the interests of directors are. They should have an obligation to avoid conflicts of interest unless those conflicts are clearly in compliance with the law and they have gone through the appropriate procedures in order to get them authorised.

Jonathan Djanogly: If what the Solicitor-General says is the case—I tend to agree with him—does he agree that we need to delete the words “or possibly may conflict” in the second line of subsection (1), because the director will not know when he becomes a director what may conflict in the future?

Mike O'Brien: No, I do not. I think that there is an obligation on a director to be diligent and take account of the circumstances that he faces. The possibility of his interests conflicting with those of the company ought to be reflected in statute. The phrase “or possibly may conflict” reflects the way in which the courts have expressed the principle. It is current law, not something new.
Mr. Djanoglyrose—

Mike O'Brien: If the hon. Gentleman will let me answer his first question, I shall be happy to give way to him.
We are not dragging in an onerous obligation that goes well beyond current ones. The clause reflects current law and is derived from the expression of the rule by Lord Cranworth in Aberdeen Railway Company v. Blaikie, that no fiduciary
“shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which may possibly conflict with the interests of those whom he is bound to protect.”
Potential conflicts, as well as actual conflicts, may put at risk or appear to put at risk the loyalty that a company expects from its directors. The provision must be read with the exceptions in subsection (4):
“This duty is not infringed...if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.”
Several hon. Membersrose—

Mike O'Brien: Several Members wish to intervene, but it will be better if I set out my argument and then take some interventions to deal with the points that have arisen. I might be able to deal with some of them as I progress.
I was asked about people absenting themselves from a meeting. People will not be able to do that as of right. They cannot just walk out of a meeting without declaring that they have interests. If they have been authorised, in advance or at the time, to have a particular interest, there should be no difficulty with them merely absenting themselves from a particular directors’ meeting. In the vast majority of cases, an appointment will be made on the basis that a director will be able to withdraw. He will have declared his interest and should therefore be able to do that.
We have no problem with non-executive directors holding company directorships or with multiple directorships. The clause broadly reflects the current situation, and subsection (1) in particular follows what is regarded as the classic statement of the current duty by Lord Chancellor Cranworth. He was followed by Lord Upjohn, who said in the House of Lords in the case of Phipps v. Boardman:
“The whole of the law is laid down in the fundamental principle exemplified in Lord Cranworth’s statement.”
The statement from Lord Cranworth was thereby backed up in the House of Lords. As Jonathan Parker pointed out in the 2003 Court of Appeal case of Bhullar v. Bhullar,
“the rule is essentially a simple one, albeit that it may in some cases be difficult to apply. The only qualification which is required to Lord Cranworth’s formulation of it is that which was supplied by Lord Upjohn in Phipps v. Boardman, where he said this:
‘The phrase ‘possibly may conflict‘ requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict’.”
We therefore have clear guidance, and as Lord Upjohn also pointed out in Phipps v. Boardman:
“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”
Flexibility of application is the essence of the rule, which is why subsection (1) is expressed in general terms. It will be for the courts, as it is now, to determine its detailed application. It seems to me that the general aim behind the Conservative amendments is to water down the duty currently owed by directors. The Conservatives seem to want directors to be free to have conflicts of interest, provided that they have declared them generally. Such a watering down of the law could expose members of companies to unscrupulous directors all too easily. We want directors to be scrupulous and careful and show due diligence, but we also want to ensure that, providing they act in the way that I have described, they can have multiple directorships.

Quentin Davies: The Pepper v. Hart rule that I have referred to already provides Ministers with the chance to clarify some of those problems in the course of the debate and will give their explanations a particular importance.
In that spirit, I put to the Solicitor-General a question: clearly, there are many obvious situations in which there is a conflict—a director of Shell cannot be a director of BP, and a director of Tesco cannot be a director of Sainsbury. Nobody can predict the future kaleidoscope of business transactions and relationships. Strictly speaking, the words “possibly may conflict” might make it an offence under the law to take up a directorship that leads to conflict, competition or a dispute between two company directorships. A person would then have committed an offence even though they could not reasonably have predicted that such a conflict would arise. Will the Solicitor-General give a clear assurance that a person could not be convicted in such circumstances?

Mike O'Brien: The hon. Gentleman cannot have listened to what I just said. I quoted Lord Upjohn, who said:
“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”
So the circumstances of each case have to be considered. Directors can put themselves quite easily in a position in which they avoid circumstances that give rise to unexpected future conflicts.
Mr. Daviesrose—

Mike O'Brien: The hon. Gentleman must let me answer his question before he tries to intervene again. If he does not like the answer, I shall give way again. We had a long debate on the last issue, and I am trying to make some progress now so he should allow me to set out the argument—it might help him.
The clause recognises that unexpected situations can arise. It states:
“This duty is not infringed—
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest”.
For as long as that remains true, the director will not be in breach of the duty, even if it turns out that the situation did give rise to a conflict, or was likely to do so. If the director knows that there is a conflict, it is a different matter and he will have to do something about it. However, the director will not be in breach if, as set out in subsection (4)(a), it could not be reasonably regarded as being likely to give rise to the conflict.
If a person cannot possibly foresee a situation, it cannot be reasonably regarded as being likely to give rise to a conflict of interest. On the other hand, if they can foresee it, the director or members of the company should be able to make an informed decision about whether it is an acceptable conflict of interest or whether the matter should be dealt with in accordance with applicable provisions under the company’s constitution.

Quentin Davies: The first half of the Solicitor-General’s response was of no help at all. It is no use quoting the jurisprudence that is anterior to the potential passage of the Bill. When the Bill becomes an Act, it mightwell be deemed by a court to have set the previous jurisprudence aside. The second part of his explanation was, however, extremely helpful, and I am grateful for that. I think that it has gone a long way to solving the problem.

Mike O'Brien: The provision will not be lacking in applicability. It is quite clear that we intend the courts to be able to refer to previous jurisprudence, so the situation is not as the hon. Gentleman described it. I quoted Lord Upjohn, because it was relevant.
Amendment No. 256 would allow directors to be in unauthorised conflict regardless of the company’s wishes as long as the director has taken “reasonable steps to” avoid it. That would be the impact of the Conservative proposal. Under the current law, there should never be an unauthorised or potential conflict. That principle exists for the protection of the company and its members.
An amendment to that strict rule, so that a director is not in breach so long as he takes all reasonable steps to avoid it, would be a change to the current law. I emphasise that the Conservatives are proposing a change to the current law, to water it down and to put company members and the operation of UK company law at risk. That is what they are proposing. It would significantly weaken the duty and the protection currently given to companies and ultimately to their shareholders. Unless the matter is authorised or dealt with in accordance with a company’s constitution, companies are entitled to expect from their directors an element of loyalty. The ability of a company to rely on this should not be made dependent on the exercise of reasonable care about whether the director has avoided a conflict.
Amendment No. 323 seeks to delete the words “possibly may conflict”. They reflect the way in which courts have expressed this principle and deleting them would depart from the current law. Potential conflicts, as well as actual conflicts, may put at risk or appear to put at risk the loyalty that the company can expect from its directors. The company should not have to wait until there is a conflict. This provision has to be read in conjunction with subsection (4).
As for amendment No. 322, the clause already recognises that unexpected circumstances can arise. Not all conflicts or potential conflicts are foreseeable. I have already set out why I believe that the director has an obligation to make it clear to his company what those potential conflicts are and to go through the authorised procedure. If he cannot foresee a situation, it cannot reasonably be regarded as being likely to give rise to a conflict of interest. If a person can foresee a situation, the directors or members of the company should be informed about that and can then act accordingly. That is the situation and we want it to continue.

Jonathan Djanogly: Can the Solicitor-General explain the extent to which information should be given and at what point it should be given? Can a general authority be given?

Mike O'Brien: May I come to that later, as that is one of the issues that I want to deal with?
Amendment No. 322 fails to take into accountthe ongoing nature of the duty. It would allow unauthorised conflicts to occur as long as they are not identifiable at the time that authorisation was given. This would be an unacceptable change in the law. It would leave companies to bear the risk of whatever unforeseen circumstances might arise, whether or not the company regards them as acceptable. That is the very opposite of the current position where all conflicts, whether they are originally identifiable or not, are unacceptable unless authorised in some way by the company, be that through its directors, its members or its constitution.
I turn now to amendment No. 257. The March 2005 White Paper version of this clause contained an exemption in which there was no real possibility of a conflict of interest. That was based on the way in which this duty has been formulated by the courts in Phipps v. Boardman. However, in the light of the consultation responses, this was replaced with an exception where the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. This already makes a situation easier from the point of view of the director.
Amendment No. 257 would go still further and would weaken the protection that this duty provides for companies and ultimately for their shareholders. It would replace the current objective test with a partial subjective test. That would be a significant departure from the current law, watering down the protection that members have. It would make it much harder for the company to enforce the law. The company would be able to enforce the law in regard to the director only if it could show that the director’s belief was unreasonable or that he was not acting in good faith. Again, the Conservatives are trying to water down the current law. They are exposing members to problems. I do not think that they want that. The problem is that they have not thought this through.
I shall deal now with amendment No. 255. The clause provides a new statutory mechanism for the authorisation of conflicts of interest by those directors who are not interested in the matter. Subsection (5) requires the matter to be proposed to directors and authorised by them. The directors should be able to give informed consent to their fellow director if he is in a situation in which he has or can have a direct or indirect interest that conflicts or may conflict with the interest of the company. The company law review recommended that the authorisation should be reasonably specific. The clause does not go that far, but nor does it provide for the blanket authorisations envisaged in amendment No. 255.
Amendment No. 255 would allow the rule on conflicts of interests to be effectively set aside in an extremely wide manner. The ability to disclose by way of general notice is appropriate in relation to transactions within a company, and clauses 163 and 168 deal with such matters, allowing interests to be declared in the appropriate way, as does current law. It would be going too far to allow authorisation to be given by way of some general notice on other conflicts of interest that may arise. The purpose of a general notice on company transactions is to put the company on notice that a director has an interest in a transaction. The company can then decide whether to take steps to safeguard its interests. As the company is a party to the transaction, it will be aware of its terms, even if not of all the details of the director’s interest.

Jonathan Djanogly: The Solicitor-General is talking about general disclosure on a transaction. What if a director were to give a general disclosure on the fact that he was interested, or had other directorships, in a certain sector?

Mike O'Brien: When it comes to other conflicts of interest, the company will not necessarily have all the additional information to hand. For example, it might not know about the property, information or opportunity to which such a conflictas the hon. Gentleman describes relates. A generalnotice might therefore give the company insufficient information to reach an informed decision. Amendment No. 255 would leave the company in the dark, which is what he proposes. It would do away with any need for the directors to be properly informed to give authorisation. A general notice, it seems, would suffice.
Under clause 171, a general notice gives notice that a director has an interest as a member, officer, employee or otherwise of another company or firm, or that he is connected with another person. The notice must also state the nature and extent of the director’s interest in a company or the nature of his connection with a person. That is it. General notices do not need to give any other information. That would not be enough under clause 161. That level of information—to be more accurate, the virtual lack of it—is likely to be completely insufficient for directors to determine whether they should be concerned about a conflict of interest that might arise. By agreeing to a general notice, directors would be authorising every conflict of interest arising in relation to the matter disclosed in the notice. That would leave companies vulnerable, as directors would be able to agree to the setting aside of their duty in an extremely wide manner.
Amendment No. 255 would also provide for authorisation to be given unconditionally, or subject to such conditions or limitations as the directors specify. That is unnecessary. The clause already allows the authorisation given by directors to be unconditional, or subject to restrictions. It is not necessary to make express provision to say so.
On amendment No. 167, there is currently no absolute rule prohibiting directors from holding multiple directorships—I have made that clear—or even from engaging in business that competes with the company. However, a tension results from that tolerance on one hand and the director’s fiduciary duties on the other. The clause does not prohibit a conflict, or potential conflict, of interest, as long as it is authorised or the director acts in accordance with the provisions on such matters in his company’s constitution. The situation is perfectly straightforward: a director can hold multiple directorships and do business. The clause presents no challenge to current law or the opportunities for venture capitalists or others to develop a range of companies and do a good job of promoting our economy.
It is surely right that a company should be given the chance, through its members, directors and constitution, to decide whether conflicts or potential conflicts are acceptable. They will be given that chance, but the Conservatives seem to propose watering down the protection that members of companies have, which is utterly unacceptable. The risks associated with conflicts of interest and the duties arising from multiple directorships are precisely the type of situation that the duty in the clause is intended to catch. The Government wish to widen the pool of potential non-executive directors, but not against the wishes of the companies of which those people are already directors.
Amendment No. 167 would create a new exemption to the duty to avoid conflicts of interests, which would change and water down current law and would conflict with the way in which the duty has been described by the courts over many decades. I could quote at length from Lord Justice James in Parker v. McKenna, but I shall not. It is clearly an inflexible rule that the Conservatives seek to water down.
Amendment No. 167 would weaken the duty owed. Before the company could deal with a director, it would have to show that it had suffered a disadvantage. That is not required at the moment, and it can be difficult to prove in questions of real or apparent bias and perhaps divided loyalties. The duties do not leave everything in the hands of the director concerned. The fiduciary duties were developed precisely because the vulnerable party—in this case, the company, its members and its shareholders—needed protecting from the directors. It is not enough to say that a conflict of interest may take place because, in the mind of a director, it will be all right. The company, through its members or the other directors, should be able to make that decision.
I get the impression that there has been a lot of lobbying from a bunch of directors who have particular fears. I hope that I have reassured them and told them that they can continue with multiple directorships. In some circumstances, there are benefits and they can be encouraged. However, companies have a right to know about multiple directorships when they arise.
I shall deal with whether there is a negative or positive test, which the hon. Member for Huntingdon asked at the beginning. The courts have on occasion characterised some of the rules on directors’ interests as negative rather than positive—disabilities rather than duties. The Bill does not do that. Clause 156(4) requires the courts to have regard to the rules and principles of the statutory statement of general duties. That may include any characterisation of any aspect of those rules and principles as negative disabilities rather than positive duties, and any consequences flowing from that in the interpretation and application of those rules and principles.
It would be wrong to label clauses 161 and 162 as disabilities. The courts have never suggested that the entirety of the rules reflected in those clauses should be treated as a disability rather than a duty. The leading case is Movitex v. Bulfield, which was primarily concerned with a conflict relating to transactions with a company. Such conflicts fall within clause 163, which simply requires disclosure. More recently, the Court of Appeal has questioned the distinction between duties and disabilities in relation to such conflicts of interest. In the case of Gwent Valley Development Company v. Koshi, it was said that, whether viewed as duties or disabilities, all such incidents are aspects of the fiduciary’s primary obligation of loyalty. That is an important point and the general duties should be considered together.
I hope that I have satisfied the hon. Gentleman about the way in which the director may perform. He will need to ensure that he is properly authorised for conflicts of interest. If he receives authorisation, does it properly and the company knows about it, he can do it. If he does not, he may well be in trouble. However, the important point is that he would be now. If the Conservatives were to change it, they would put members and companies at risk.

Jonathan Djanogly: The Solicitor-General’s full response is appreciated. It will need careful review. However, he started by saying that there is no problem with people holding multiple directorships. That is simply not the case. People have been telling us that there will be exactly that problem. It is yet to be seen whether what he just said will satisfy stakeholders, but I doubt it. He has not helped to allay my concerns that a director will have a real problem avoiding a situation that, possibly, may conflict. If, for instance, I were an electronics expert and a director of an electronics company looking for a non-executive directorship in the electronics field, it could be argued that, if I took up such a post in a field similar to the company in which I was a director, future conflict would be likely—through competition, one company buying another or any number of other possibilities. I would know that that situation could arise, but as things stand it would not present a problem because people declare interests when they need to do so. That point was made clearly by my hon. Friend the Member for Grantham and Stamford, who spoke with an authority that comes from experience. He explained how he has found conflict situations work in practice. For the most part the existing system works pretty well.
We are some way from the Government’s position and we wish to express our concerns on the practical implications of the clause. On that basis, I shall ask the Committee to divide on amendment No. 257. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 257, in clause 161, page 71, line 11, leave out paragraph (a) and insert—
‘(a) if the director reasonably and in good faith believes the situation is not likely to give rise to a conflict of interest; or’.—[Mr. Djanogly.]

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 10.

Question accordingly negatived.

Clause 161 ordered to stand part of the Bill.

Clause 162

Duty not to accept benefits from third parties

Jonathan Djanogly: I beg to move amendment No. 155, in clause 162, page 71, line 31, after ‘benefit’, insert ‘of more than £1,000’.

John Bercow: With this it will be convenient to discuss amendment
No. 154, in clause 162, page 71, line 44, at end add—
‘(6) This duty is not infringed if the acceptance of the benefit is approved by the board of the company.’.

Jonathan Djanogly: The clause introduces a duty on directors not to exploit their position for personal benefit. They will be liable only if accepting the benefit would give rise to a conflict of interest, in which case they will be caught under that duty and that in clause 159. By virtue of clause 156(2)(a), the duty is extended to former directors in relation to
“things done or omitted by him before he ceased to be a director.”
Although that duty is clearly based on the common law duty to account for any secret profit, there is no exact corresponding duty to the duty in this clause.
Lord Freeman moved a probing amendment toleave out this clause. It aimed to obtain a definition of benefit and to find out whether an indemnity to a director from a third party relating to the performance of his duty or non-financial benefits would be caught by the clause. Lord Goldsmith responded that benefit under the clause covers all forms of benefit given to a director as a result of him being a director. We do not think that the Lords amendment needs to be raised again, but we have concerns and have therefore tabled other amendments.
The Law Society’s parliamentary brief raised the point that a director should be able to obtain approval of a proposed benefit from the board or shareholders. Furthermore, where a joint venture company has been established, benefits provided by one of the parties, who may not be an associate for the purposes of subsection (2), to a director may be caught under the prohibition. Norton Rose’s briefing note states that the prohibition in clause 162 will give rise to debate and some uncertainty over what benefits may be regarded as likely to give rise to a conflict. Directors will therefore need advice as to what benefits may be accepted. I should be grateful if the Solicitor-General told us whether he has given any thought to that matter.
The CBI fears that the clause may make directors reluctant to delegate authority to committees. Amendment No. 154 would therefore insert an approval mechanism. Finally, we wonder whether the clause should apply to de minimis amounts. MPs have limits beneath which they do not need to declare sums. Why should not directors have that? We suggest excluding small amounts and £1,000 is proposed purely on a probing basis.

Mike O'Brien: Our approach to theconflict of interest duties reflects the approach by the company law review. In the words of the review, it strikes the right balance between encouraging efficient business operations and the take-up of business opportunities on the one hand and providing effective protection against abuse on the other. The reviewwas rightly concerned that a strict no-conflict rulemight fetter entrepreneurial and business start-up activity by existing company directors. It is therefore recommended that, in relation to the personal exploitation of corporate opportunities, it should be possible for the company’s rights to be waived by the board acting independently of any conflicted director. That approach was followed by clause 161, which introduces the new statutory mechanism for the authorisation of conflicts of interest by those directors without an interest in the conflict.
The same arguments do not apply in respect of the acceptance of benefits from third parties in the clause. That is why the review rightly did not recommend that independent directors should be able to authorise acceptance of benefits from third parties. The issue is not the relative seriousness of the abuse, although the acceptance of a bribe by a director can certainly be a serious abuse. Rather, it is about whether other considerations, particularly those relating to the need to encourage entrepreneurial activity and business success, counterbalance the need to provide effective protection for companies against the risks of conflicts of interests by their directors. Those other considerations do not arise to the same degree when it comes to the acceptance of benefits from third parties which should go to the company. Therefore, the acceptance of such benefits should not be left to the self-regulation of the directors themselves.
The hon. Member for Huntingdon asked about benefits. To some extent, his question was dealt with by the Attorney-General in another place. A benefit for the purposes of this duty includes benefits of any description, including non-financial benefits. In using the word “benefit”, we intend the ordinary dictionary meaning of the word. The “Oxford English Dictionary” defines it as a favourable or helpful factor, circumstance, advantage or profit.
In Cronin v. Grierson, the courts had to consider the meaning of the word “benefit” as used in section 2(3) of the Betting, Gaming and Lotteries Act 1963, which states:
“A player’s success at the game shall not entitle any person to, or to exchange any prize or token for, any benefit other than those provided for by subsection (2) of this section.”
In that case Lord Morris said that a successful player who won the jackpot was given preferred terms for further playing and as a result was most likely or almost certain to have further gain. He added that that was a benefit. Lord Upjohn said that benefit is a word of wide import and that in this context it means no more than advantage. He said that he could not construe it as being limited to a tangible, corporeal advantage in the sense of a prize token or article. Therefore, while the meaning of the term will ultimately be a matter of statutory interpretation for the courts, it is intended to include, and we consider that it does, non-financial benefits.
As far as the de minimis rule is concerned, we do not agree that it is necessary. Financial thresholds are by their nature arbitrary and sit uneasily with the function of the general duties, which are set out as general principles governing the obligations of directors. There is a general duty owed by the director to a company and as such it is concerned with the underlying harm that will be done to the interests of the company or the risk of such harm occurring.
There is no financial threshold in the current law. The current law does not seem to need one and neither the Law Commission nor the company law review recommended that there should be one. The current law operates a much more sophisticated test based on the risk of a conflict of interest. That is how subsection (4) operates. A director may accept a benefit if it cannot reasonably be regarded as being likely togive rise to a conflict of interest in the specific circumstances of the individual case. This is not simply a matter of the financial value.
I happen to have had a dinner with the hon. Member for Grantham and Stamford some years ago. He will recall the incident because it featured in the newspapers. At one point I remember he bought a very expensive bottle of wine. Some people might regard that as an inducement. However, most people would regard the purchase of a mere meal as not being an inducement or bribe of any sort. But wines varyin price. They can be worth many hundreds andindeed thousands of pounds. What is a benefit? The circumstances must dictate that.
Mr. Djanoglyrose—

Mike O'Brien: I give way if the hon. Gentleman is really interested in this wine question.

Jonathan Djanogly: I am. The reason why is because it is rather proving my point. Why have all the complication of deciding whether a wine is an expensive bottle of wine and whether it will influence people or not? Why not just have a de minimis level under which it is considered unnecessary to go into what the Solicitor-General called the sophisticated argument?

Mike O'Brien: The hon. Gentleman is clearly a discerner of fine wines on the basis that he can afford them. A small company might well find that £1,000 was quite a substantial inducement to a member of a company or a director of a company. Companies vary in size. One thousand pounds may be a mere de minimis amount to him. It may be simply the price of a bottle of wine to him but it will not be for most people. For many people, particularly in a small company, £1,000 is not minimal, but significant. Therefore, it should be for the company to determine in the particular circumstances it faces whether a benefit was one that should concern it.
A director may benefit if it cannot reasonably be regarded as giving rise to a conflict of interest in the specific circumstances of the individual case. Such benefits with a small monetary value may be effective bribes because they take account of the director’s particular interests or passions. For example, the hon. Member for Huntingdon likes wine. I know that the hon. Member for Grantham and Stamford does. A ticket for a one-off performance or a carefully chosen gift for an avid collector of wine may be quite an inducement. I therefore think that we should not have the de minimis clause; we should leave it to the company to consider its own circumstances.

David Howarth: Does not the Solicitor-General consider that there might be some merit in a combination of the two proposals? For very small amounts, the directors might well be in a good position to give authorisation. Under the ratification provisions of clause 222, the shareholders are required to give authorisation. That seems to be a rather cumbersome procedure for the authorisation of asmall deal.

Mike O'Brien: If the company wants to set that out in its constitution or to change things, it is able to take the steps necessary to authorise a particular approach by directors.

David Howarth: That raises a general issue about the degree to which the rules in the Bill are mandatory. Clause 154, which we did not discuss, is understood to be mandatory because all the clauses in the Bill are considered mandatory unless otherwise stated. The Solicitor-General’s comments seemed to go against that.

Mike O'Brien: A company will need to be able to determine whether a director’s benefits present a problem; it might be concerned only about some benefits. Providing that is all done openly, there will not be a problem that we need worry about. But the company must have the right to intervene if it is concerned about the benefits that a director has obtained.
The de minimis provision presents a technical issue. What is a benefit of £1,000? What does that mean? Many benefits might not be in cash or have a clear monetary value. Who would be responsible for assessing the value of such benefits? The third party might choose also to pay the benefit in instalments. What is the position if a director accepts a payment from a third party of £950 one week, and another of equal value the next week? It is not entirely clear. There are definitional issues here.
The proposal by the hon. Member for Huntingdon would produce all sorts of threshold issues and create fresh opportunities for those who wish to evade their directors’ duties. It would be possible to respond by introducing detailed anti-evasion provisions, but that would further complicate an area of law that we are trying to codify. We do not want to complicate that further, so let us leave out the de minimis provision and ensure that companies can determine the best approach for dealing with conflicts of interest. The duty not to accept benefits from third parties should remain on directors.

Jonathan Djanogly: I am not entirely sure what the Solicitor-General was going on about when referring to fine wines—I think I got lost on about the third bottle.
From the contributions that I have heard, I am not sure that we have reached the right approach. As the hon. Member for Cambridge pointed out, the clause could probably be improved by being more flexible. The Solicitor-General was not necessarily without reason in querying whether the drafting of my amendments was as fine tuned as it could have been. However, I have made my point. We will think further about the matter over the summer. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 162 ordered to stand part of the Bill.

Clause 163

Duty to declare interest in proposed transaction or arrangement

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: According to the explanatory notes, the clause replaces the existing rule that directors may not have interests in transactions. The Law Society, however, asserts that it is an entirely new duty with no equivalent in common law. Its parliamentary brief raises the issue that the purpose of the clause is to make a company’s board aware of the interests of one of their number, but the clause states that declaration of interests of which the director is unaware cannot exert influence and therefore need not be disclosed.
The Law Society asked for clarification of a couple of points. Will the clause affect the director of a parent company who has had an interest in a transaction of a subsidiary company? Will the interests of a person connected to a director need to be disclosed? A report in the Solicitors’ Journal pointed out that the requirement to disclose matters of which a director ought reasonably to be aware, is onerous. It will require directors to keep themselves fully up to date with the affairs of the board and its committees, which could be difficult for non-executive directors. It would be helpful to hear the Solicitor-General’s views on those concerns.

Mike O'Brien: Clearly, a director is able to display only the diligence, skill and knowledge that he has. If he does not know about things, he does not know about things. If he is aware of potential conflicts, he has a duty to declare an interest in a proposed transaction or arrangement.
The clause replaces the equitable principle that directors may not enter into contracts with their company or have an interest in any of the company’s contracts. For the benefit of the Law Society, thecases include Aberdeen Railway Company v. Blaikie Brothers. It is the same principle that prevents an agent from contracting with his principal and the trustee from contracting with his trust, as set out in Keech v. Sandford. Those are the authorities. The reason for the strict rule is that the company is entitled to the collective wisdom of its directors. If any director is interested in a contract, his interest may conflict with his duty, and the law always strives to prevent such conflict arising. The rule applies even if the contract is fair. The courts will not look into the merits but strictly adhere to the law that a possible conflict of interest and duty must not be allowed to arise.
It would, however, be commercially impossible for the strict equitable principal to apply without some qualifications. A director may therefore enter into a contract with a company or have an interest in such a contract if he obtains the company’s consent first. Consent may be given by the members, or in some way through the articles.
In common law, the company is at liberty to waive the rules protecting it as a principle in dealings in which directors have an interest. For that reason, section 317 of the Companies Act 1985 imposes a statutory minimum disclosure requirement. There are three sets of rules about company contracts in which a director has an interest: the strict equitable principle, any relaxation of the principle via the company’s articles, and section 317 of the 1985 Act. The varying requirements of each and their interaction is important.
The hon. Gentleman asked whether directors should not be required to disclose what they do not know. In other words, if they do not know it, how will they disclose it? One purpose of the clause is to ensure that the board is aware of anything that may influence decision making by individual directors, but that is not the only purpose of the rules governing transactions between a company and its directors. The rules exist to protect the company. There must be no conflict or any risk of conflict, and good faith must be manifestly applied.
In the Law Commission’s review of section 317 of the 1985 Act, it noted that article 8(6)(b) of table A excludes from the range of interests to be disclosed those of which the director has no knowledge and of which it is unreasonable to expect him to have knowledge. Its view was that such interests should be exempt from disclosure, and the Bill adopts that approach in respect of the declarations of interest required under clauses 163 and 168. As such, it reflects the current position for those companies. I hope that with that reassurance, the hon. Gentleman will accept that he need not worry unduly. I hope that the Law Society is reassured, too.

Jonathan Djanogly: I thank the Solicitor-General for his reassurance and clarification.

Question put and agreed to.

Clause 163 ordered to stand part of the Bill.

Clause 164

Civil consequences of breach of general duties

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause states that the civil consequences of breaching a duty in clauses 157 to 163 will be the same as for breaching the corresponding common-law rule or equitable principle. The Law Society’s parliamentary brief points out that clause 164(2) implies that fiduciary duties other than those codified in chapter 2 apply to directors and remain outstanding, and that that confusion should be cleared up. Other commentators have noted that the clause is poorly drafted, saying that it will not cover situations in which a director has breached a statutory duty for which there is no corresponding common-law rule or equitable principle. Norton Rose’s briefing note raises that issue, stating that it is unclear how the civil remedies will apply as most of the duties concerned are not identical to those established by case law. The courts’ existing remedies may be inappropriate when applied to statutory duties that have been cast in different terms.
Have the Government considered those issues in more detail since their consideration in the Lords?

Mike O'Brien: The clause explains what will happen if a director breaches his general duties. Subsection (1) states that the consequences will be the same as those that currently apply. There will be no criminal consequences. Subsection (2) is intended to remove any doubt that general duties can be enforced in the same way as the common-law rules and equitable principles that they replace. The fiduciary remedies currently available will still be available following a breach.
Clause 156(3) will tell the courts that each duty contained in the statutory statement is based on a common-law rule or equitable principle. Where those duties have been codified the courts will be able to identify the relevant rule or principle. Where they have been changed the courts will need to find the rule or principle that covers the same subject matter as the general duty contained in the statutory statement. If necessary, the explanatory notes and the comments made here today can assist in that exercise. However, once the corresponding rule or principle has been identified in the courts the question will be what the consequences should be if it is breached in particular circumstances and whether a general duty has been breached.
Clause 164 preserves current law on the consequences, including remedies, flowing from any breach of duties. The fact that the general duties might depart from common-law rules and equitable principles in certain ways will not alter the circumstances flowing from their breach. The question will not be whether the rule or principle has been breached but what the consequences should be once it has been breached.
The consequences of a breach of the fiduciary duty can include damages, compensation, restoration of a company’s property, rescission of a transaction or a requirement of a director to account for any profits made as a result. They may also include injunctions or declarations, although those methods are primarily employed when a breach is threatened but has not yet occurred. The consequences of a breach of the duty of care and skill may include the court awarding compensation or damages.
I hope that the hon. Gentleman will feel that the Law Society’s concerns have been met.

Jonathan Djanogly: I thank the Solicitor-General for that clarification.

Question put and agreed to.

Clause 164 ordered to stand part of the Bill.

Clauses 165 and 166 ordered to stand part of the Bill.

Clause 167

Modification of provisions in relation to charitable companies

Mike O'Brien: I beg to move amendmentNo. 301, in clause 167, page 74, line 17, leave out ‘or Northern Ireland’.
The amendment extends the provisions of clause 167 to Northern Ireland. At present, charities are subject to similar rules on the management of conflicts of interest whether or not they are set up as companies. The clause modifies the general rules on conflicts of interests so that directors of charitable companies do not face weaker duties than those of other charity trustees.
The clause will reverse the various relaxations to the strict no-conflict rule made by the Bill. Charitable companies will still be able to take advantage of the various relaxations, where their constitutions allow it. That has the benefit of openness and transparency. It will be clear from the charity’s constitution whether it can take advantage of a relaxation of the strict no-conflict rule. Clause 167 applies to England and Wales. The amendment will extend the provisions to Northern Ireland.

Jonathan Djanogly: I have no comment.

Amendment agreed to.

Clause 167, as amended, ordered to stand part of the Bill.

Clause 168

Declaration of interest in existing transaction or arrangement

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause deals with the declaration of interest in existing transactions or arrangements and ties in with section 317 of the 1985 Act. Rather than go over all the debates in the Lords, I shall identify one particular point. Subsection (5) states that a director must declare matters
“of which he ought reasonably to be aware.”
There is no corresponding requirement in section 317.
The Law Society stated that the requirement to declare matters of which directors ought reasonably to be aware is particularly onerous and should be left out. The Solicitor-General will note that I have not tabled an amendment to that effect, but I would be grateful for his views on subsection (5) and reasonable awareness.

Mike O'Brien: The Government take the view that directors have some substantial obligations and that they ought to declare those things about which they should reasonably have been aware. That is an objective test applied to directors concerned. So it will take into account any relevant circumstances relating to that director; it will focus on the individual director. This is the question that will be asked: whatis it reasonable to expect a director in those circumstances to have been aware of? For example, a non-executive director might be expected generally to be less aware of the individual transactions or arrangements entered into by a company.
I repeat that directors are not expected to disclose things that they do not know. One of the purposes of the clause is to ensure that the board is aware of anything that might influence a director’s decision. The director can disclose only what he is aware of, and if he is aware of it, he ought to declare it. The clause therefore will be clear enough, but anyone who wants clarification can read the notes on the clause or, on the basis of Pepper v. Hart, read my comments in Hansard.

Jonathan Djanogly: I was desperately trying to keep up with the Solicitor-General there, but I think that I failed, so I shall have to do exactly that and read his comments later. I might possibly return to the matter at a later stage, but I thank him for his clarification.

Question put and agreed to.

Clause 168 ordered to stand part of the Bill.

Clause 169 ordered to stand part of the Bill.

Clause 170

Declaration made by notice in writing

Jonathan Djanogly: I beg to move amendment No. 274, in clause 170, page 75, line 21, at end insert
‘provided that, if the company has a secretary, the notice need only be sent to the company secretary.’.

John Bercow: With this it will be convenient to discuss amendment No. 275, in clause 170, page 75, line 25, after ‘post’ insert ‘or by facsimile’.

Jonathan Djanogly: The clause contains new provisions outlining how a director can make a declaration by notice in writing. It states that such a declaration must be sent to other directors in hard-copy form by hand or by post, unless a recipient has agreed to receive it electronically. Once a declaration has been made by that method, it is deemed to form part of the next board meeting’s proceedings.
The Law Society parliamentary brief proposes an amendment to subsection (2) to require a director who makes a declaration to send the notice not only to the other directors, but to the company secretary, if the company has one. The secretary should be aware of declarations, and a central record should be kept.
The Law Society also proposes an amendment to subsection (4)(b) to enable a director to send the notice in electronic form if another director has, in general, agreed to receive all declarations of interest in that form, and not just if an agreement has been reached on a specific declaration.
In a large company, almost everything will go through the company secretary’s department, and it would probably be seen as rude to send official notices directly to other directors. In reality, many directors will not know where their fellow directors are half the time and they would, in any event, see that as the role of the company secretary. I would be grateful to hear the Solicitor-General’s views on that.

Mike O'Brien: Our view is that informing a company secretary is insufficient and that the other directors need to know about any declaration of interest by a fellow director.
We do not accept that it is particularly onerous to tell other directors of a declaration, because they will—particularly these days—be in contact with their office or place of business, and there will be a method of sending them a letter or other communication. Directors must already declare an interest under section 317 of the 1985 Act and article 85 of table A, so it is no great change to require them to continue todo so.
Company directors take decisions, sometimes daily, and they should be informed of any issues about which they need to know. A director who declares an interest may send the notice to the company secretary, who may then send it to the other directors—that is not a problem. However, the responsibility for ensuring that it is sent out to the other directors must rest with the director who sent it; he cannot abrogate that responsibility by giving the notice to the company secretary and saying, “Right, I’ve sent it to you. That’s it, I don’t have to tell anyone else. It’s up to you to make sure you contact everyone else.”
It is the director’s responsibility to ensure that the other directors are informed. If they are happy to be informed in a particular way—they might well want to be informed by the company secretary—they can authorise that, but we should not take away the director’s responsibility for telling the other directors.
The hon. Gentleman did not speak to amendment No. 275, but let me address it by saying that clause 807 defines electronic means as including faxes. It depends on the view of the recipient as to whether he is prepared to receive things by fax—some people are, some are not. Faxes are a very inefficient means of communicating, as I found this morning when I tried to receive one. The printer on my fax machine had broken down, so nothing but a blank sheet of paper came through. If the intention had been to inform me of a conflict of interest, I would not have been informed.
Faxes are, therefore, not particularly reliable. None the less, some people may wish to receive the declaration by fax, in which case authorisation may be given. If the recipient agrees that they will receive a declaration by fax, that is fine; if they do not, they should receive it in the proper form, and the director has an obligation to send it in a form that is easily readable. Indeed, these days, e-mail is probably an easier way of getting in contact with people than fax, but e-mails, too, have a habit of going astray.

Jonathan Djanogly: On the latter point, I thank the Solicitor-General, first, for reminding me that I did not speak to that amendment. I suppose that, as far as the Government are concerned, we now live in a post-fax age, and his view reflects that. I do not necessarily disagree, but some people have only just moved on to fax and have not quite got round to e-mail yet.
On amendment No. 274, we are coming round in a circle so as to decide what the responsibilities of company secretaries should be. The Government have, I suppose, made it clear that they are not much interested in the officer role of the company secretary. What the Solicitor-General just said ties in with that, in so far as he said that company secretaries should not be responsible for sending out documents and that it is the director’s responsibility. I suppose that is in accord with cutting out company secretaries generally. We do not agree about that, but the debate has already taken place. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 170 ordered to stand part of the Bill.

Clauses 171 to 173 ordered to stand part of the Bill.

Clause 174

Directors’ long-term service contracts: requirement of members’ approval

Jonathan Djanogly: I beg to move amendment No. 276, in clause 174, page 77, line 46, at end add—
‘(8) Any accidental failure in the procedures to submit a memorandum under the provisions of subsection (5) shall not invalidate the approval of the guaranteed term.’.
The substance of the clause is essentially the same, subject to slight redrafting, as the corresponding provision in the 1985 Act. The primary changes arein subsection (5), which states that a shareholder resolution approving a relevant service contract is not valid unless, in the case of a written resolution, it has been sent to all members. No provision for a written resolution is made in section 319 of the 1985 Act.
The Law Society’s parliamentary brief recommends an amendment inserting a new subsection, underwhich the accidental failure to send a copy of the memorandum setting out the proposed contract, which must be sent to shareholders if approval is to be valid, would not invalidate the shareholder approval. The reason for the proposal is that a minor oversight should not invalidate the shareholder approval if all other procedures have been carried out.

Mike O'Brien: I do not dispute the point dealt with by amendment No. 276. Indeed, the hon. Gentleman will find that it is covered in clause 209.

Jonathan Djanogly: On the basis of that clarification from the Solicitor-General, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 174 ordered to stand part of the Bill.

Clauses 175 to 178 ordered to stand part of the Bill.

Clause 179

Exception in case of company in winding up or administration

Jonathan Djanogly: I beg to move amendment No. 426, in clause 179, page 79, line 32, at end insert
‘, or
‘(c) that is in receivership.’.
The February 2006 finance e-bulletin from Herbert Smith, the solicitors, welcomed the changes that will be made to the law by the clause. It was pointed out that insolvency practitioners find the procedure of selling the assets of a company in administration to directors difficult, as shareholder approval is necessary under section 320 of the 1985 Act. That is often difficult to obtain in practice, so such transactions must be structured to exclude any director involvement. The amendment would simply clarify the definition used for the forms of insolvency.

Margaret Hodge: In true collectivist tradition, I shall reply on this amendment.
The general rule is that member approval is needed for a substantial property transaction with a director. The clause provides an exception for transactions made by companies in administration and implements a recommendation of the Law Commission.
The amendment would go further by allowing a substantial property transaction to take place without shareholder approval if a company was in receivership. That could cover a wider range of situations. We do not think that that would be appropriate, as there would be a risk of abuse. A receiver may be appointed by a director or a connected person and would not necessarily be a licensed insolvency practitioner. I therefore hope that the hon. Gentleman will not press the amendment.

Jonathan Djanogly: I thank the Minister for that clarification, which I understand and agree with.On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 179 ordered to stand part of the Bill.

Clause 180 ordered to stand part of the Bill.

Clause 181

Property transactions: civil consequences of contravention

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause deals with the civil consequences of contravention in property transactions, which is mainly dealt with in the 1985 Act. Will the Minister please explain subsection (7), which is substantially different from section 322(4) of the 1985 Act? Can she give examples of a person not knowing the relevant circumstances that constitute contravention?

Margaret Hodge: I will write to the hon. Gentleman.

Question put and agreed to.

Clause 181 ordered to stand part of the Bill.

Clauses 182 to 184 ordered to stand part of the Bill.

Clause 185

Credit transactions: requirement of members’ approval

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause replicates part of the 1985 Act. Just as with clause 180, credit transactions that were completely prohibited by section 330 can now be approved by members. Furthermore, clause 185 applies to all companies, whereas section 330(4) applies only to public companies. Private companies that can currently enter into such a credit transaction would have to obtain member approval. That implements a recommendation of the company law review. However, this is a deregulatory Bill, and I note that although public companies have been given the opportunity to provide credit, the clause now brings private companies into the net of requiring shareholder consent. Why is this regulatory move being made?

Margaret Hodge: The simple answer is that it was suggested by the Law Commission, and we followed its recommendation. If the hon. Gentleman wants further clarification, I am happy to provide it.

Jonathan Djanogly: Yes, but I make the point again that the Bill is meant to be deregulatory, so I see no need to tighten existing provisions. I would happy for the Minister to reply by letter.

Question put and agreed to.

Clause 185 ordered to stand part of the Bill.

Clauses 186 and 187 ordered to stand part of the Bill.

Clause 188

Exception for expenditure on company business

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: Section 337(2) of the Companies Act 1985 is amended by this clause so that the relevant amount that does not require shareholder approval is raised from £20,000 to £50,000. How was the new figure derived?

Margaret Hodge: I will have to write to the hon. Gentleman.

Question put and agreed to.

Clause 188 ordered to stand part of the Bill.

Clauses 189 and 190 ordered to stand part of the Bill.

Clause 191

Exceptions for minor and business transactions

Jonathan Djanogly: I beg to move amendment No. 277, in clause 191, page 86, line 19, leave out ‘£10,000’ and insert ‘£50,000’.

John Bercow: With this it will be convenient to discuss amendment No. 278, in clause 191, page 86, line 26, leave out ‘£15,000’ and insert ‘£50,000’.

Jonathan Djanogly: My point is simply that the exception on company business does not come into play until the value exceeds £50,000. For simplicity, would it not be easier to standardise the figures in the exclusion clauses? The figure suggested is probing.

Margaret Hodge: The exception in clause 188 to which the hon. Gentleman refers is for company business. I questioned that myself. If someone were to have a credit limit for a trip abroad or something similar, as long as they were on company business, it would be appropriate to have it at that level. Clause 191 deals with loans to individual directors and does not necessarily have any relation to the activities that they may undertake on behalf of the company. That is the reason for the difference.

Jonathan Djanogly: I thank the Minister for her explanation. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 191 ordered to stand part of the Bill.

Clause 192 ordered to stand part of the Bill.

Clause 193

Exceptions for money-lending companies

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The wording of clause 193 has been moved around, but it is the same in substance as section 338 of the Companies Act 1985. The only substantial change is that the maximum amounts of £100,000 in section 338 for both loans to a director and loans for the purchase of a director’s residential property have been abolished. Why was it decided not to have some kind of cap?

Margaret Hodge: The answer is again that it was the Law Commission’s advice in establishing the issues. I do not have any information beyond that. As I have done with other detailed questions, I shall take it away and consider it.

Question put and agreed to.

Clause 193 ordered to stand part of the Bill.

Clause 194 ordered to stand part of the Bill.

Clause 195

The value of transactions and arrangements

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: Clause 195(7) will reduce the valueof a transaction arrangement incapable of being expressed as a sum to £50,000 from the £100,000 amount set in section 347 of the 1985 Act. Will the Minister specify why that figure has been reduced? It may be that this one will go on her figures list.

Margaret Hodge: It will. I will have to come back to the hon. Gentleman about that. I think that these are all Law Commission suggestions that the Government simply ratified, but I do not have the rationale with me.

Question put and agreed to.

Clause 195 ordered to stand part of the Bill.

Clauses 196 to 198 ordered to stand part of the Bill.

Clause 199

Payments for loss of office

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The United Kingdom Shareholders Association said that it was surprised to see clauses 195 to 202 in the Bill, but that they are welcome. Did the Government consider abolishing clauses 199 to 206? There is an exception in clause 204 for payments made under a service contract or related to an employment claim. Material contracts must be approved under earlier clauses. Will the Minister put on record why the provisions are required and why the exception for small payments in clause 205 is so low at £200?

Margaret Hodge: I can respond to the hon. Gentleman’s questions on this clause. It defines what is meant by a payment for loss of office for the purpose of the chapter: a payment made to a director or former director to compensate them for ceasing to be a director. It also includes payments for losing
“any other office or employment in connection with the management of the affairs of the company”
or subsidiary.
Payments made in connection with retirement as a director or retirement from any other office or employment connected with the management of the affairs of the company or subsidiary are also included. However, payments are included only if the person is a director of the company when the office or employment ceases or if the retirement or loss occurs in connection with the director ceasing to be a director. That is the explanation that I have for clause 199.

Question put and agreed to.

Clause 199 ordered to stand part of the Bill.

Clauses 200 to 215 ordered to stand part of the Bill.

Clause 216

Provisions protecting directors from liability

Mike O'Brien: I beg to move amendmentNo. 302, in clause 216, page 98, line 32, at end insert—
‘( ) section (qualifying pension scheme indemnity provision) (qualifying pension scheme indemnity provision).’.

John Bercow: With this it will be convenient to discuss the following: amendment No. 206, in clause 216, page 98, line 36, at end add—
‘(5) This section does not apply to a provision made by a company (“Company A”) in respect of a director of an associated company of Company A—
(a) if the associated company is a wholly owned subsidiary of Company A, or
(b) to the extent that the associated company is acting or, otherwise than in bad faith, purporting to act as a trustee of an occupational pension scheme.’.
Government amendments Nos. 303 to 309.
Government new clause 29—Qualifying pension scheme indemnity provision.
Government amendment No. 310.

Mike O'Brien: I shall begin by declaring an interest in respect of the clause. My wife is a trustee of Logica CMG pension fund.
The amendments concern the indemnification ofa director of a company acting as a trustee of an occupational pension scheme. They deal with worries that were raised in another place. It was said that such directors perform a vital role, often for little direct financial reward, and that directors’ and officers’ liability insurance policies currently available afford limited protection. We made it clear in another place that the Government attach importance to the work of such directors and that we were aware that it can sometimes be difficult to recruit high-quality directors for companies acting as trustees of occupational pension schemes. In view of that, and following consultation with key stakeholders, we agreed in principle to table amendments that would permit companies to indemnify the directors of associated companies acting as trustees of occupational pension schemes. That is what the Government amendments would provide.
Amendment No. 206 has two elements. I hopethat one of them, the indemnification of directors of associated companies acting as trustees of occupational pension schemes, has been dealt with by the Government’s amendments. The other element would allow a company to indemnify the directors of its wholly owned subsidiaries. We cannot accept that. The Companies (Audit, Investigations and Community Enterprise) Act 2004 closed what was an important loophole concerning the indemnification of directors by third parties.
It used to be the practice in some groups of companies for one group to indemnify a director of another company in the same group. We do not believe that that is acceptable as a matter of principle. If one company in the group were not permitted to provide indemnification, it would not be right to permit another group to do so. That is most certainly the case when a subsidiary company is used as a vehicle for indemnifying the director of a parent company,but we also believe that there would be scope for potential mischief if we permitted a parent companyto indemnify the directors of its wholly owned subsidiaries.
It is important to bear it in mind that all companies are now permitted to indemnify directors against most third-party liabilities. That is an important reform and it is difficult in light of it to see why the hon. Gentleman tabled such an amendment. Indeed, I hope that he will not press it to a Division. A parent company wishing to take action against the director of a wholly owned subsidiary will have a number of options at its disposal, possibly including the director’s dismissal. There seems to be little to be gained by the amendment to offset the potential for mischief. We therefore cannot accept amendment No. 206, but I commend the Government amendments and new clause to the Committee.

Jonathan Djanogly: We have no principled problem with the Government amendments, although we will want to have a good look at them over the summer. This is a complicated area of law and it is not easy to examine the issues arising from clauses 216 and 222 in isolation, so to discuss the amendments I shall first set out the overall picture as it stands following the recent changes brought into force by the Companies (Audit, Investigations and Community Enterprise) Act 2004, and what changes these new provisions are designed to introduce.
Clause 235 defines what is meant by a person being connected with a director. For the purposes of the clause, that may include fellow directors. If the ratification decision is taken by way of a written resolution, the director and his connected persons may not take part in the written resolution procedure. That means that the company need not send them a copy of the written resolution and they are not counted when determining the number of votes required for the written resolution to be passed. If the ratification decision is taken at a meeting, those members whose votes are to be disregarded may still attend the meeting, take part in the meeting and count towards the quorum for the meeting if their membership gives them the right to do so.
Clause 222(6) makes it clear that nothing in the clause changes the law on unanimous consent, so the restrictions imposed by the clause as to who may vote on a ratification resolution will not apply when every member votes, informally or otherwise, in favour of the resolution. Subsection (6) also makes it clear that nothing in the clause removes any powers that the directors may have to manage the affairs of the company. Subsection (7) explains that the requirements imposed by the clause are in addition to any other limitations or restrictions imposed by the law as to what may or may not be ratified and when.
In light of the changes, companies will probably want to consider entering into individual indemnity agreements with directors and to check their articles of association. Most companies have indemnity provisions in favour of the company’s directors in their articles of association. However, although the articles in effect form a binding commitment between the company and its members, a director is not a party to that arrangement and may not therefore be able to enforce directly an indemnity in his favour.
In Globalink Telecommunications Ltd v. Wilmbury Ltd, it was held that a company’s articles of association were not automatically binding as between the company and its officers, but could expressly or impliedly be incorporated into a contract between the company and a director. To mitigate the risk of not being able to enforce an indemnity in the company’s articles, directors are therefore increasingly seeking the protection of stand-alone indemnities. Many directors already have the benefit of indemnities in contracts with the company—for example, in their service contracts, letters of appointment or stand-alone deeds of indemnity—and companies may want to consider amending the relevant indemnities to provide the increased protection permitted as a result of the changes introduced by the 2004 Act.
We have two primary concerns about this part of the Bill. The first was expressed by our noble Friends in the House of Lords: these clauses do not allow protection from liabilities for certain directors who should be protected. Our second concern relates to the changes to the law on ratification which the Bill imposes.
These clauses deal with provisions that protect directors from potential liabilities. I spoke previouslyin relation to part 10 about the importance of maintaining a corporate environment that encourages companies to stay in the UK rather than discouraging them from doing so. Ensuring that the best people still wish to take on the burdens and responsibilities of company directorships is essential in maintaining a company-friendly environment in the UK.
During the Government’s lengthy consultation preceding the Bill, two principal concerns were identified in relation to directors’ liabilities. The first related to directors’ increased exposure to liability arising from legal proceedings brought by third parties. That is particularly relevant due to the increase in class actions being brought against company directors in the United States. I have at some length made the case that the combination of new provisions in the Bill—not least other provisions of part 10 working together with part 11—will, in our view, lead to further litigation against directors.
The second major concern relates to the costs incurred by directors in defending legal proceedings, which companies could pay only after judgment was given in the director’s favour or after an acquittal. Both those factors have led to growing concerns among directors that the fees that they are being paid for their services do not justify the potential liabilities to which they are exposing themselves. That is a concern especially for non-executive directors.
An article in the December issue of the Practical Law Company’s magazine, written by two solicitors from the City firm Freshfields, examined how demands for changes to the law originally started. They said:
“The risk of a director having to bear the expense of protecting himself against claims brought by the company, liquidators, disgruntled shareholders (perhaps in the US courts) or a regulatory body were seen as a deterrent to well qualified candidates being willing to serve as directors.”
To some extent, those concerns have been dealt with by the introduction of several new clauses into the Companies Act 1985 via the Companies (Audit, Investigations and Community Enterprise) Act 2004. It would help if the Solicitor-General were to put on record how effective the DTI has found those new provisions, which came into force in April 2005.
This chapter of the Bill does not cover directors of subsidiaries and employing companies indemnifying the directors of corporate trustees of their occupational pension schemes. On Report in the Lords, Lord Freeman tabled an amendment that sought to meet concerns that the Bill goes too far in preventing parent companies from indemnifying directors of their subsidiary companies, particularly in preventing employing companies from indemnifying the directors of corporate trustees of their occupational pension schemes. That is a particular problem, as the directors’ and officers’ liability insurance policies that are currently available give only limited protection to employee directors.
The aim of Lord Freeman’s amendment was to aid the recruitment of and provide protection for employee directors of subsidiary companies, and would include protection for company secretaries, who often act as directors of subsidiary companies. Having a company secretary as a director aids administration and compliance requirements. Furthermore, many directors often act as directors of subsidiaries before advancing to the board of the parent company. That common business practice is jeopardised by the Bill.
Lord Freeman’s amendment was tabled in the Lords both in Committee and on Report. While the Bill was being considered in Committee, the Attorney-General sought further consultation on the problems that were highlighted. In relation to indemnification by an associated company of a company acting as trustee of an occupational pension scheme, the Attorney-General agreed to accept, in principle, that aspect of Lord Freeman’s amendment. The Government accepted that the indemnification of trustees is not otherwise a controversial practice, and that concerns need to be addressed. Clearly, they are addressing this issue with their amendments today.
Despite expressing sympathy regarding some of the concerns that were raised by those in the business and legal communities who will be affected by the clause, the Government seem to have done little to meet their concerns about the other aspect of the amendment. The Institute of Directors makes that clear in these comments to us:
“The Government has said it may be prepared to extent the scope to employee directors of corporate trustees...Without such indemnity being available any well-informed person will be unwilling to act as a director or officer of a subsidiary undertaking. Becoming a director of a subsidiary is very often the route to directorship of the parent. Without the experience and development offered in subsidiaries directors will be less well-placed to take on the role of director of the parent, with the likelihood that both performance and governance will suffer.”
What is the Government’s latest position on this issue? Are they considering whether to extend the scope to employee directors and corporate trustees? The serious concerns of the party that represents company directors in the UK should not be treated lightly.
I reiterate that it is important to keep good company directors in the UK. Company directors are vital to the running of successful companies, and successful companies are vital to the running of the country’s economy. To bring in measures that will discourage good people from becoming company directors because of the liabilities that they might face would damage the economy of this country. To counter that threat, we tabled the amendment, which was drafted by the CBI and which aims to meet the concerns that I have outlined regarding the indemnification of subsidiary directors. Now that I have put forward the arguments of those at the forefront of this area of law and business, I hope that the Government will reconsider the amendment and look upon it more favourably.

Mike O'Brien: I have dealt with the amendment, so let me reply in more general terms. Our reforms in the Bill strike a careful balance betweenthe interests of directors and the need to protect companies and, ultimately, their shareholders. It is important that the law is able to deal firmly but fairly with cases where something has gone wrong, but we certainly recognise that there is a need for a diverse pool of high-quality individuals who are able to assume the role of company director, and for directors to be willing to take informed and rational risks.
A number of reforms were introduced through the 2004 Act, and they address many of the hon. Gentleman’s concerns. It is too early to say how they have worked, as they have only just been enacted. Let us wait and see how they develop.
The package of reforms is important. Companies are permitted but not required to indemnify directors against liabilities for third parties. It was a major area of concern, particularly in the case of companies with a US exposure which wished to be able to indemnify directors against liabilities arising from class actions by groups of shareholders.
Companies are permitted but not required to pay directors’ defence costs as they are incurred, which seems to run contrary to what the hon. Gentleman said, unless I misunderstood him. Even if the company brings the action or it is a derivative action, indemnification may cover legal and financial costs of any adverse judgment, subject to exceptions for criminal fines, penalties imposed by regulatory bodies, the costs of criminal proceedings in which the director is convicted, the costs of actions brought by the company when final judgment is given against the director and the costs for unsuccessful actions for release.
The package of measures ought to command widespread support. It will encourage entrepreneurial behaviour by directors and safeguard the interests of companies and their shareholders.

Jonathan Djanogly: There is one point on which I should be grateful to hear the Solicitor-General’s views. In his earlier remarks, he said that one main reason why he did not like our amendment was the scope for abuse that might result from it. Will he explain in more detail where the abuse is likely to come from?

Mike O'Brien: I have set out our concerns about the amendment. For example, if a parent company could indemnify the directors of wholly owned subsidiaries for whatever they liked, it would be used to get around the restrictions placed on the indemnities that companies may give to their own directors or those of other, associated companies.
Group companies can be highly interconnected, with myriad links and interdependencies—often even more so with wholly owned subsidiaries and their parents. They may share directors and officers, and they may have entered into cross-guarantees or made loans to each other. They are not in a different enough position to justify their exemption from the restriction to the indemnities that other group companies might give to directors of companies within the group. Such exemption might even encourage the setting up of artificial group structures to take advantage of it. Therefore, we oppose the hon. Gentleman’s amendment.

Jonathan Djanogly: I am not entirely convinced by the Solicitor-General’s argument, but we will go away and think about it. On that basis, I beg to ask leave to withdraw the amendment.

John Bercow: It does not need to be withdrawn, because it has not been moved, but I am grateful to the hon. Gentleman.

Amendment agreed to.

Clause 216, as amended, ordered to stand part of the Bill.
Further consideration adjourned.—[Steve McCabe.]

Adjourned accordingly at sixteen minutes to Eight o’clock till Thursday 13 July at Nine o’clock.